Frank Boykin - CFO Jeff Lorberbaum - CEO Chris Wellborn - COO.

Keith Hughes - SunTrust John Baugh - Stifel Stephen Kim - Evercore ISI Sam Eisner - Goldman Sachs Michael Eisen - RBC Capital Markets Timothy Wojs - Baird Scott Rednor - Zelman Mike Wood - Nomura Instinet Phil Ng - Jefferies Michael Rehaut - JPMorgan Mike Dahl - Barclays Laura Champine - Roe Equity Research Stephen East - Wells Fargo Christ Kalata - Credit Suisse Pete Galbo - Bank of America David MacGregor - Longbow Research Eric Bosshard - Cleveland Research.

Good morning. My name is Sia and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries Fourth Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, February 9, 2018. Thank you.

I would now like to introduce Mr. Frank Boykin. Mr. Boykin, you may begin your conference, sir..

Thank you, Sia. Good morning, everyone, and welcome to Mohawk Industries' Quarterly Investors Conference Call. Today we'll update you on the company’s results for the fourth quarter and full year of 2017 and provide guidance for the first quarter of 2018.

I would like to remind everyone that our press release and statements that we make during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties, including but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission.

This call may include discussion of non-GAAP numbers. You can refer to our Form 8-K and press release in the Investor Information section of our website for a reconciliation of any non-GAAP to GAAP amounts. I’ll now turn the call over to Jeff Lorberbaum, Mohawk's Chairman and Chief Executive Officer.

Jeff?.

Thank you, Frank. In 2017, our strong organization and long-term strategies allowed Mohawk to deliver record-breaking results. For the full year, our revenues rose to an all-time high of $9.5 billion, a 6% increase. We generated operating income of $1.4 billion, up 6% as reported and 9% excluding restructuring, acquisition and other charges.

Our EBITDA rose to $1.8 billion both records. Our reoccurring business income grew at a much higher rate in 2017 when excluding the expired patent income and the incremental start-up investments.

During the year, we identified opportunities for growing our business, differentiating our products, improving our productivity which we supported with over 900 million of internal investments, the highest in our company history.

Over the past three years, our strategies of adding new products, increasing our capacities and acquiring new businesses have led to an expanded earnings even as income from our Click patent expired.

Our 2017 results reflected the impact of these strategies including 34 million of start-up costs to ramp up new products and production and significant increases in raw materials. During the past year we completed four acquisitions to broaden our product offering and improve our cost structure.

These include bolt-on Ceramic businesses in Italy and Poland and a U.S. top mine for ceramic materials and a nylon polymerization plant to further integrate our carpet manufacturing. In 2018, we’ll invest additional 750 million in our existing businesses to complete projects that were begun in 2017 and to commence new initiatives.

Our largest investments during the two-year period are the expansion of our LVT in the U.S. and Europe, ceramic capacity increases in the U.S., Mexico, Italy, Poland, Bulgaria and Russia, laminate luxury laminate in the U.S., Europe and Russia, carpet tile in Europe, sheet vinyl in Russia and countertops in the U.S.

and Europe, as well as carpet and rugs in the United States. We are awaiting government approvals which take longer in Australia and New Zealand to finalize our acquisition of Godfrey Hirst, the largest flooring producer in those countries. We expect to enhance Godfrey Hirst’s strategies as well as our existing U.S.

carpet manufacturing as we learn from each other. In addition, we anticipate synergies between Godfrey Hirst’s expanding hard surface sales and existing Mohawk distribution in both countries. The U.S. economy strengthened during the Spring and Summer through increased consumer spending, business investments and job creation.

The fourth quarter growth moderated, U.S. GDP is forecast to increase in 2018 along with an improving global economy. According to the National Association of Home Builders, single family housing rose 8.5% in 2017 and the organization is predicting further single-family home growth in 2018.

Harvard’s Joint Center for Housing study predicts this year could deliver the strongest remodeling gains in more than a decade with the support of a strong economy, increasing housing values and low unemployment.

The American Institute of Architecture is projecting increased construction spending in non-residential buildings noting that national disasters in 2017 and corporate tax relief will support additional building expansion.

Outside the U.S., economic growth is projected for the European Union as confidence improves across all business sectors and employment increases across the Euro zone. Higher oil prices should benefit the Russian recovery and Mexico should see continued economic growth consistent with recent years.

Turning to our fourth quarter performance, we recorded our best results for the period with sales of $2.4 billion, up 8.5% over the prior-year and operating income of $343 million, growing 13% while absorbing start-up costs of $10 million.

In the period, our ongoing business income grew at a much higher rate when excluding the decline in income from patents. Chris Wellborn, our Chief Operating Officer, will now provide a more detailed look at our fourth quarter performance by segment..

Thank you, Jeff. In the quarter, our Global Ceramic sales increased 10% as reported and 8% on a constant currency and days basis. Sales in Russia and Mexico grew the fastest and our European acquisitions added 6% to our sales.

As anticipated we saw improvement in our legacy sales during the period with additional capacity coming online in Mexico, Russia and Europe and strengthening sales in the U.S.

The segment’s operating margin for the period was 14% as reported, up approximately 20 basis points including the cost from upfront investments in countertops, service centers, integration of acquisitions and plant start-ups. We anticipate our ceramic sales growth to increase in 2018. Our U.S.

business improved as we progress through the period even with large customers postponing product changes and making reductions in their inventories. We are excited about our innovative new wood and stone ceramic collections with merchandising that conveys their unique features and benefits to consumers.

To increase our sales in distribution, we have opened 15 new tile and stone centers in the past 12 months. This year, single-family home construction should provide the greatest growth opportunity for our U.S. tile business.

To capitalize on this, we are expanding our partnership with both national and regional builders across the country including both our tile and countertop products. Our counter top sales are accelerating as we increase our distribution points and broaden our quartz offering.

We have hired industry experts from around the globe to start our new state-of-the-art quartz countertop plant which should be operational by the end of the year. In the U.S. market, we have also begun introducing porcelain slab countertops, which are being manufactured in our new Italian operations and replicate marble, granite, or other surfaces.

Our ability to leverage existing relationships should enable us to achieve a leading position in the fast-growing quartz and porcelain countertop category. During the period, our North American ceramic operations achieved record performances in productivity, quality and cost.

Across all facilities, we are improving the recycling of our waste and the safety of our people. The Mexican ceramic market is strong. We are increasing sales with our recently expanded production. Our new Salamanca plant is fully operational and production is ahead of our expectations.

We are introducing premium collections with European styling in large formats, which are not currently produced in Mexico. We’re also expanding our sales throughout the South American market with our new capacity by providing unique styling and larger sizes. Our European ceramic sales increased substantially and outperformed the market.

We benefited from the addition of both our Italian and Polish acquisitions. We have made significant progress in integrating these businesses, broadening their product offerings and enhancing their sales strategies.

We’ve installed a new production line in Italy, and we are adding new capacity in Poland which will be running in the third quarter to expand our northern and Central European sales. We are expanding Marazzi-branded showrooms and adding commercial specifiers to increase our business.

During this quarter, we are starting porcelain slab production which creates large floor and wall tiles as well as furniture, kitchen and bath countertops. Our proprietary Reveal Imaging technology replicates stone, wood and textile visuals on the slabs. We are optimizing our manufacturing by realigning production to our best-suited assets.

We are producing larger sizes in the Bulgarian market to increase our sales and enhance our mix. This geographic expansion has strengthened our European ceramic business and will enable further growth across the region.

In 2017, the Russian ceramic market improved slightly from the recessionary trough and is still experiencing significant pricing and volume pressure. In this environment, our ceramic business is outperforming the market with sales and margins growing as we increase our market share.

Our high-styled offerings, consumer brands, franchised and owned retail stores and efficient operations give us a significant competitive advantage. We’ve been operating at full capacity and are expanding our production to satisfy the growing demand and increase our market share.

In the fourth quarter, our Flooring North America segment margins increased approximately 130 basis points while absorbing $10 million of restructuring cost and sales rose 3%. During the period we also incurred start-up costs of $2.5 million associated with our new LVT line.

Late in the fourth quarter, we implemented a carpet price increase to recover rising inflation. We continue to improve the value proposition and mix of all of our products providing new features and benefits to the consumer. We have started presenting our new collections at our regional shows, and they are being enthusiastically received.

Our carpet sales were strong during the period as some customers raised their inventory levels prior to our price changes and residential sales continued to grow faster than commercial. Almost all channels in residential improved, highlighted by the success of our SmartStrand and Continuum product offerings.

To better serve our dealers, we have recently combined our hard and soft surface residential sales management. We are seeing improvements in performance as we better leverage our relationships across our entire product portfolio.

Our SmartStrand Silk Reserve collections are gaining momentum as luxury consumers choose our super-soft carpets with superior performance. As more homeowners select patterned carpets, the distinctive designs in our premium Karastan brand are driving sales growth.

Our revolutionary Airo product is unified soft floor covering that is gaining momentum in the marketplace. Airo is a hypoallergenic fabric that is constructed from 100% recycled materials.

The product takes less than half of the typical installation time of a traditional carpet by using only a knife and double-faced tape and can easily be recycled at the end of its life.

With our new carpet tile and broadloom collections, our commercial sales are strengthening in most channels, with particular growth in hospitality, institutional, retail and Mainstreet.

The enhanced segmentation of our commercial sales organization by channel allows us to better leverage our soft and hard surface portfolios to provide comprehensive project solutions. Sales of our award-winning Lichen Collection are accelerating as customers embrace its leading design and unique sustainability story.

We are introducing a new patented backing system in carpet tile to enhance our lower-priced collections. We’re expanding our rigid and flexible LVT offerings with specific products tailored for each of the residential, do-it-yourself, apartment and commercial markets.

During the quarter, we increased our marketing investments in LVT to expand our sales in anticipation of a new manufacturing line which will be in production in the second quarter. We are introducing RevWood Plus, a revolutionary new waterproof wood product with leading style in larger sizes and contemporary finishes.

RevWood Plus creates another unique position for Mohawk in the marketplace. During the quarter, our Flooring Rest of world segment continued to outperform posting an 18% increase in sales as reported and 9% on a constant currency basis as local economies improve and the Euro strengthened.

The price increases we implemented over the dramatic changes in our material cost in most of our products. Our reported operating income for the period increased 19% as a result of improved productivity, price, mix and a reduction of restructuring and acquisition charges.

Agreements have been finalized with our patent licenses and our IP income has exceeded our original estimates due to our patents growing use in LVT. Excluding the impact of our expired patents, our operating income for our ongoing business increased substantially with all product groups contributing.

We’ve agreed to acquire Godfrey Hirst, the largest flooring company in Australia and New Zealand, which is focused on carpet and expanding in hard surface Flooring as well as a small European mezzanine floor manufacturer which will enhance our wood panel strategy and differentiate our products.

In 2018, we’ve also finalized the acquisition of two small distributors in Europe to enhance our geographic penetration. Our LVT sales are growing rapidly as we push the limits of our capacity. We have the broadest LVT offering in Europe and we are positioned as the market’s style, design and performance leader.

Our new LVT line is presently operating two shifts as we refine our processes and improve productivity. Initially we will produce our existing products to satisfy present demand before we add new rigid collections to expand our offering.

Our new European carpet tile plant has initiated limited manufacturing with the final operational phases scheduled to come on line this quarter before a full market launch in the second period. We have hired experienced carpet tile salespeople to build our distribution.

As the world’s leader in premium laminate, we offer the most recognized brands and best retail merchandising with the highest quality and fastest service in the industry. Our laminate sales are growing, driven by unique features such as planks over two meters long and our exclusive waterproof technology.

Our laminate sales are increasing as an alternative to wood due to its more desirable styling, greater durability and easier care. Leveraging our design and technical leadership we are expanding our sheet vinyl distribution in both the residential and commercial channels. Our new plant in Russia should start up in the fourth quarter of 2018.

We are preparing for the launch by developing products tailored to the Russian market and assembling and experienced sales organization. Our installation business has strengthened as our pricing aligned with inflation and as material shortages have declined. We anticipate lower material cost in the future as additional supply becomes available.

During the period, our wood panel sales and margins improved with increasing demand and improved efficiencies. New panel introductions enhanced our sales and mix and process improvements have reduced our cost. I’ll turn the call over to Frank to review our financial performance for the period and year..

Thank you, Chris. Net sales for the quarter were $2.369 billion, up 8.5% as reported. Our legacy business grew 4% on a constant exchange rate with all segment growth rates improving over the third quarter rates. Our gross margin as reported was 31.8%.

Excluding charges, the margin was 32.3% improving over last year as price mix and productivity offset inflation and lower IP. SG&A as reported was 17.3% of sales, or 17.1% excluding charges, which was an improvement of 40 basis points over last year. Unusual charges for the quarter were $15 million.

They were primarily related to plant consolidation and acquisitions in Flooring North America and in Global Ceramic. Our operating margin excluding charges was 15.1%.

That’s up 40 basis points over last year with positive price mix of $59 million and productivity of $44 million, offsetting $57 million of inflation, as well as incremental start-up cost of $5 million and lower IP income. Interest expense was $7 million during the quarter.

We estimate annual interest expense to range from $33 million to $37 million in 2018, excluding the Godfrey Hirst acquisition. In other income and loss, we have a loss in the quarter of $4 million compared to a gain of $2 million last year. The difference is primarily related to foreign exchange movements.

In income taxes, our tax rate excluding nonrecurring items was 27.2% for the quarter compared to 23.6% last year. The 2017 tax reform resulted in a fourth quarter non-cash benefit of $151 million for revaluation of deferred taxes offset by a charge of $152 million for unrepatriated foreign earnings.

The tax will be paid over eight years beginning in 2019. Our 2018 first quarter tax rate should range from 19.5% to 20.5% and for the year is expected to be about 21%. Our 2019 tax rate is anticipated to increase by about 2 percentage points.

Earnings per share excluding charges was $3.42, an increase of 5% over last year even with lower IP and higher start-up cost this year. If we move to the segments, in the Global Ceramics segment sales were $824 million, an increase of 10% as reported. Our legacy business is up 2% on a constant basis with all regions growing.

Our growth rate improved this quarter over last quarter. Our operating margin excluding charges was 14% with productivity of $16 million and volume of $6 million covering inflation of $12 million. In the Flooring North America segment sales were $999 million, a 3% increase. We had good growth in both LVT and in Carpet.

Our operating margin excluding charges was 16.7%. It improved 160 basis points as positive price mix of $21 million and productivity of $22 million offset $20 million of inflation. In the Flooring Rest of World segment sales were $546 million, up 18% as reported. Sales grew 9% on a constant exchange rate basis with all major categories improving.

Both price, mix and volume drove higher sales. Our operating margin excluding charges was 15.8%. Our higher operating income in the quarter was impacted by positive price mix of $35 million and productivity of $6 million along with better volume offsetting inflation of $24 million and lower IP.

As a reminder, we will continue to have a year-over-year headwind from the expired patent revenue until June of this year. In the Corporate and Eliminations segment, our operating loss excluding charges was $10 million. We expect the segment loss to range from $35 million to $45 million in 2018.

Jumping to the balance sheet, our receivables ended the quarter at $1.558 billion with days sales outstanding of 59 days. Our inventories were $1.949 billion with inventories at 119 days. Inventories have been impacted by higher raw material cost, ramp up of new products and backwards integration. We anticipate lowering our inventory next year.

Property, plant and equipment was $4.2 billion. In the fourth quarter, we had capital expenditures of $251 million with depreciation and amortization of $118 million. We are estimating capital expenditures for 2018 of almost $750 million with depreciation and amortization estimated at approximately $520 million.

In long term debt, our total debt was $2.8 billion with leverage at 1.4 times debt to EBITDA. I’ll now turn the call back over to Jeff..

Thank you, Frank. The record results that Mohawk delivered reflect the unique strategy that combine the best features of a large, well-run public company, a private acquisition firm and a venture capital group.

Our organization’s capability to continuously expand by innovating our products, increasing our portfolio and participating in new regions is unsurpassed in the market.

This year, to enhance our long-term growth and profitability, we will invest $60 million to $70 million starting up new operations to expand our market position and geographical scope.

Of these investments, about one-third is in noncash depreciation due to limited utilization, one-third is for marketing to expand our distribution and one-third is for the cost of ramping up new production. In the first quarter, we anticipate all segments improving sales and the introduction of innovative products across our portfolio.

In Flooring North America, the timing of our carpet price increase moved some sales into the prior quarter. Our ongoing operating results, excluding the expired patents and start-up investments, was substantially improved in the first quarter.

Our earnings will benefit from our past acquisitions, a stronger euro, as well as our 2018 global tax rate, which will decline to approximately 21% due to tax reform. Taking all of this into account, our EPS guidance for the first quarter is $2.93 to $3.02, excluding any onetime charges.

The acquisition of Godfrey Hirst will be completed later this year after normal closing conditions are concluded. We anticipate opportunities to enhance their product innovation and marketing strategies, lower their cost by supplying raw materials and increasing sales of other hard surface products.

Godfrey Hirst should be accretive to EPS by $0.35 to $0.40 first year in the first 12 months. We’ll now be glad to take your questions..

[Operator Instructions] Your first question is from Keith Hughes with SunTrust..

You have made some comments on ceramic improving as the quarter went along.

Can you just kind of give us your view on the ceramic pace of sales, what caused that, and how we started out 2018?.

Yes. Our overall ceramic segment growth was about 8% and we’re adding capacity in four countries. The U.S. business improved during the quarter and the trends are continuing. With our new plant in Mexico running, we’re returning to our historical posture to optimize.

LVT did increase significantly and has absorbed a large part of the industry growth, but our new U.S. plant will allow us to expand our LVT offering and increase our business..

And do you have kind of a feel for what growth rates you think you’ll see in ceramic in 2018?.

I think they’re going to continue to improve. We saw them gradually improve through the fourth quarter and are continuing to improve, so I think you’ll have gradual improvement through the year..

We still have to be - the LVT growth, depending upon how much it grows this year, could impact the sales growth of everything again next year. It’s hard to tell..

Final question. Frank had referred to inventory levels coming down in 2018.

Is that something you’re going to do here early in the year, take down production to get those down? Or will it come gradually as the year goes along?.

It’ll probably be gradual as we go through the year. Now, some of it’s caused by the increase in raw material prices before the selling price have gotten through and continuing. Some of it’s caused by further backward integration we’ve done, and we are going to reduce the inventory some more..

The next question is from John Baugh with Stifel..

I was curious you commented that ceramic was strong, I believe, in Russia and Mexico, and I wonder if you could comment in those two markets specifically what the dynamic is between LVT incursion versus ceramic growth. Are the dynamics different in those markets for the U.S.? Thank you..

The U.S. LVT is different than the Rest of the World. It depends on a couple of things. One is I would guess we’re probably at least two years or more ahead of Europe’s adaptation, they’re using it but not at the same rates in Europe.

And then, when you move into other markets where ceramic is a much lower cost product to produce as well as to install, the cost difference between ceramic and LVT is dramatically different, so in those markets I’m not sure what LVT will do.

On the basis of the markets, the Mexican markets growing about double-digits and we’ve been growing but we’ve been limited in how much we can grow without the new plant we just started up, so it’ll help us grow. In addition, we’re using the Mexican market as a base to start entering into the South American business.

When you go into Russia, I think they’re down about 30% from the peak. They came off the trough this year. Prior to this year, they were declining. It came off the trough this year but barely and in that environment we’re sold up so we’re putting in new capacity and the question is going to be how fast it ramps up.

Is it like historical things in Russia where it ramps up dramatically or is it going to be slow because of the changes in the oil to the economy? We’re just preparing for our business to do much better..

And then on repatriation, is there an opportunity or will you keep cash, whatever you have, in foreign areas because of acquisition opportunities? Thank you..

So we’re really not changing our strategies. We were using most of our cash in the markets we were in and it’s not going to change what we’re doing much..

The next question is from Stephen Kim with Evercore ISI..

Appreciate all the detail, but as usual, we have some additional questions. I guess my first question is kind of a broader one. It relates to the likelihood that we would see a positive mix or a negative mix.

I know that, Jeff, you’ve talked about the fact that you’ve been capacity constrained in a lot of areas of your business and I think you’d indicated that in that situation, you tend to favor the higher margin-type opportunities that arise and then if the new capacity comes on, there’s a concern that that’s going to be margin derogatory At the same time you’ve talked about optimizing to larger tile formats in Mexico and Bulgaria.

You talk about LVT rigid being a higher price point than the more flexible stuff.

So when we stand back and look at all of your businesses, how do you think about mix? Will it be positive or negative excluding any, you know, price and input commodity distortions?.

The goal of our business every year is to improve the innovation we bring to the marketplace and improve our mix and we have new innovations in every product category and every market that we’re going into.

On the other hand, when you put in significant increases in capacity in something, you have to get the sales to move up as quickly as possible to cover the depreciation of the new assets so we also in some cases as we do that, actually sell more lower-end business.

I think this year you’ll still see a positive mix, but with all the new capacity coming on, there will be more pieces but in most cases the new capacity is still limited to the almost $10 billion of sales we have..

So it sounds like maybe positive mix this year but maybe even more maybe next year. My second question related to productivity. I didn’t hear a productivity number in terms of an outlook. I think last year you’d given some outlook for how productivity might do for the whole year.

Frank, maybe you could give us a sense for what you’re comfortable with and maybe what we might see in 1Q?.

Yes. Productivity in 2016 was $140 million and it will be, it was $180 million as you know in 2017.

I’ll just add in here that most public companies don’t greenfield businesses as we’re doing here, as many as we’re doing due to the higher start-up cost, but we are going to see much longer, much better longer-term returns as a result of the greenfield-ing even with all these start-up costs.

And I would say with more investments in new products and the geographies that we’re doing, much of the benefit that we’re going to see from these investments are going to be in 2019 and beyond. In 2018, we’ll have significant amount of productivity, but it will be more in line with what we saw in 2016..

The next question will come from Sam Eisner with Goldman Sachs..

So just on some of the new capacity that’s coming online, it looks as though we’re finally reaching the point where you’re actually starting to put product out into the market.

Without obviously giving us any kind of guidance for the full year, how should investors expect kind of either an earnings or a top line acceleration? Is that something that begins to occur for you guys starting in the back half of this year, or is that more 2019? Just kind of a better understanding of when’s this stuff coming to market and how the business should ramp..

We have a long history of outperforming the market, and I’ll remind you, over the last three years, the compounded growth rate for sales was 9% and our operating income compounded at 22%, even with the expiration of our patents. This has come from these investments we’ve done in our existing businesses, new acquisitions and greenfield-ing.

We believe we can outperform the market going forward with our strong management and balance sheet, and we’re going to try to grow it as fast as we can.

When you do a lot of these new things we’re doing, the equipment doesn’t show up when it’s supposed to, it doesn’t start up like it’s supposed to, you train people, so it’s going to be a little more volatile than normal. But that’s what you get. But the long-term returns are going to be much better..

And then maybe just focusing on the start-up costs, there does seem to be a little bit of a shift going on here from the fourth quarter into the first quarter as well as 2018.

Can you maybe just talk about rather than necessarily the numbers, what operationally is causing that start-up shift? Are things behind schedule? Can you maybe walk through some of the facilities and kind of the operational side here and what’s causing that shift?.

You see it as a shift, we just see it as a normal piece. I mean, things move a month or two either direction, so we ended up with about $34 million of start-up costs this year, and next year, we have it at about $60 million to $70 million.

And in that, a lot of it’s coming on as we speak now, so the investments will be heavier in the first quarter than through the rest of the period as you go through. We don’t really see it any change..

If I can just sneak one more in here just on Godfrey Hirst, does the $0.35 to $0.40 include synergies within that first 12-month period, or is that just base business?.

It includes everything..

The next question is from Michael Eisen with RBC Capital Markets..

Just want to think a little more big picture longer-term.

In the past, you’ve talked about the capacity expansions you guys have done over the last few years supporting well over a billion dollars of incremental revenues, so I just wanted to get a better understanding of what you guys are seeing in the end markets that give you comfort in maintaining these elevated CapEx spending levels and kind of how we should think about the $750 million in 2018 playing out longer-term in benefits..

From a big picture, all signs that we see in our industry are positive almost in every marketplace. If you look more at the U.S. business, business and consumer spending appears to be strengthening. We see the tax law changes as supporting more growth.

If you look at the existing and new home sales, everything is expecting them to continue to grow with higher home prices, encouraging more remodeling as you go through. As you go through, you just pick different markets. In Mexico, we were constrained by the capacity. So that came up in the fourth quarter, and we’ll get benefit out of it.

We’re putting new capacity in Europe in two or three different countries. We’re putting new capacity in Russia because we’re basically sold up in the marketplace that’s just coming out of the bottom of a recession. We’re investing in new products to go into. We’re going into carpet tile, which is a new marketplace.

It’s going to take longer to develop the business than the other ones because we don’t have a core base there already selling that. A big opportunity. We’re doing the same in Russia with sheet vinyl going into new business. So we have a lot of things going on in every country trying to drive our business forward and do much better than the market..

And then just one quick follow up.

When I’m thinking of kind of the start-up costs and the associated SG&A spending to increase the marketing and the sales force, does the SG&A component of it follow some of the start-up costs where it’s going to be very first quarter, first half weighted? Or how should we think about the cadence of headwinds from both line items flowing through the year?.

I don’t have it broken down by individual pieces but what happens is there will be more in the first quarter, a little less in the second quarter, and then the first half will be heavier than the second half, assuming that the stuff starts up like we anticipate. It could be longer or shorter..

The next question is from Timothy Wojs with Baird..

I guess, just, maybe back on ceramic.

Could you talk a little bit about the destocking in the fourth quarter and how do you expect the retailers to kind of spend and set their businesses in 2018?.

Well, if you look at 2017 we were capacity constrained in the first part of the year. We added capacity which came up in the fourth quarter.

At the same time, we had several product change-outs that happened last year and the retail is really starting at the end of the fourth quarter and into the first quarter taking those new products, that product transition..

So what happened in the first half we were operating under constrained conditions and we managed our business based on that and when the capacity comes up, it takes a little while to change strategies from optimizing limited capacity to selling more, and so we’re in the process of that change as we speak..

And then maybe just on price and cost.

How do you think that should trend through 2018 just given where raw materials have kind of moved to today? Do you feel like you need to put in more price increases?.

Your guess is as good as ours. All the price increases that we’ve put in were based on the costs and our anticipation of where it is. We’ve had oil and commodities seem to have gone up but then oil’s dropped back down.

I mean, if I could guess the oil prices I wouldn’t be doing this job, because I can tell you that last year, we had huge inflation in almost every product and marketplace and we implemented pricing to cover it and whatever happens this year we’ll react to it again..

The next question will come from Scott Rednor with Zelman..

I think there is a lot of question just on the timing of investments. So in 2016, the overall legacy sales grew 6%, and in 2017 they grew 4%, and I think consensus is looking for right around 5% in 2018.

Given the visibility you have on some of these investments coming to market, are you comfortable with that estimate out there?.

We think our sales growth in 2018 will be higher than 2017 and it all depends on how this stuff works through and what the markets are but we’re going to try to get as high as we can..

And then, Frank, what’s the total outflow for acquisitions that we should consider in 2018?.

I think it’s about 400 to 450..

And so, Jeff, just realizing the stocks lags you guys are going to generate more than enough cash even with the CapEx.

Would you ever consider going back and buying back the stock if you don’t feel like the current valuations reflecting the returns that you see in the next couple of years from the CapEx that you’ve put in?.

I think we’re going to continue reviewing the opportunities that we have to invest in our business. I can tell you those are always the best returns we can get. Our goal is to keep finding new acquisitions in the categories we’re in. If you look at the world, I mean, there is huge continents, we don’t have anything yet.

So I mean, a major part of the world we don’t have anything.

In areas where we’re already in, examples in Europe we’re the largest producer of ceramic but we still have a very small market share and we just started a few years ago so there’s opportunities to look at acquisitions to consolidate it more in Russia where we are and moving into other ones.

If we don’t find those, as we go forward, we’ve also started to move into countertops which gives us a new leg on the product and if you look long-term, it wouldn’t surprise me that we pick up one more big opportunity somewhere along the line to keep it going.

Given all that, I sure wouldn’t mind going into a slower period with capital, which I’ve never been able to do and I think that I could find opportunities that I haven’t been able to do in the last time because I was always out of money with my capital structure full, so I think we’re well-positioned for whatever happens..

The next question is from Mike Wood with Nomura Instinet..

Good job covering the inflation with price in fourth quarter. Some of the other building product companies have pointed to first quarter and first half 2018 headwinds.

Is that impacting your profitability in your first quarter guide or can you talk about what’s embedded in your forecast?.

I think for the most part, we’ve covered most of the increase at this point based on where it was, back in the end of the fourth quarter. Now as the raw materials go up, we’re going to have to review what they have and see if it makes any changes. I’m not sure where they’re going to level out.

If you could tell me where oil prices will be next month, it would help me..

Yes. I guess I was just more thinking about what’s factored into your first quarter guidance, so we had an idea..

I think right now, we’re planning on covering whatever inflation that we might have in the first quarter..

We have a difficult time too. We have this price mix that we follow. I mean, it’s hard to tell the difference between price and mix as many products as we have and how much to just product sales change from period-to-period. It’s hard to tell which is which at some point..

And in terms of the LVT launch coming online here with the rigid, can you talk about kind of the lessons learned from the flexible LVT line launch and what sort of expected with how this ramp goes?.

Yes. I think the biggest part is that the line we put in LVT in the United States was dramatically different than everything we had done and it took us a while to figure out how to optimize it. The new line, we’re taking all those learnings and expanding upon it but it’s also making rigid LVT which the old one didn’t.

There are two lines that we’re putting up that are almost identical. One in the United States and one in Europe. The one in Europe has already started up.

There’s about two, I think we’re running about two shifts now working through the start-ups in it and we’re using it on existing products which our European business was oversold in, so we’re moving that through.

We should start trying to make ridges pretty soon in it and hopefully we’ll have most of the problems worked out before we start the new line in the U.S. which will be in the second quarter some time..

The next question will come from Phil Ng with Jefferies..

Good to see another strong year of productivity planned for 2018 but with inflation ticking up and another 3 million of start-up costs, do you anticipate you’ll be able to drive margin expansion this year?.

I think if you look at our business excluding IP and excluding incremental start-up costs that we’re going to see good margin, good operating income growth..

And switching gears to your LVT business, you obviously have a lot of capacity that’s coming online. Any color in how that’s coming along in terms of the ramp, order patterns, and potential contribution to top line this year? Thanks..

The new lines, it depends on how fast we fill them up and how fast we can get the cost structures to where we want as well as how fast we can get them into the marketplace.

I would guess there will be some improvement in the second half but the first half, the costs will be higher than the production or the margins will be just as a normal course of events and starting new stuff up..

The next question will come from Michael Rehaut with JPMorgan..

Frank, I just wanted to go back to an earlier question around margins and you’re good enough to give an expectation around productivity for 2018. I guess when you answered it in an earlier question that said we expect margins or profitability to be up.

Will you exclude the IP and so forth? In 2017, you were able to achieve 40 bps consolidated improvement, and I believe you were expecting continued further margin improvement even with IP in 2018.

Has that changed at all? And perhaps is it due to a timing issue with start-up costs? But how are you thinking about consolidated margins in 2018, given that you’ve said a little bit less in productivity focusing on a lot of the start-up issues going on? Should we still expect consolidated expansion all-in?.

I think as I said before, Mike, I mean, you made a good point. We’re doing - we’re investing a significant amount back into business. We’ve got a lot of new projects that Jeff has already talked about with start-up costs.

Timing is not always certain with these projects and when they’re going to come up, but what we do know for sure is that excluding start-up and excluding IP we’re going to see good growth on our operating income..

Maybe asked another way. When you look at Flooring North America, you continue to do fantastic there in terms of year-over-year margin improvement with the fourth quarter, again, up strongly year-over-year and a lot of that driven by productivity.

How do you think about the trajectory of the margin for that business? You kind of exceeded a little bit of a 14% margin in 2017. At some point, everything else equal, you’d expect the incremental margin improvement or the margin expansion to slow a little bit.

Are we starting to get in that period where you’re not necessarily going to do 100 bps to 150 bps a year of margin expansion?.

I would say that Jeff sitting across the table here from me and looking at this picture up on the wall that says we’re always half way there, so we were never going to be satisfied without improving over where we were before.

But on the other hand, we’re working through, like I’ve already said a couple times, a lot of start-ups, a lot of projects in North America. We’ve got a big, big LVT plant coming up with new technology, and so we’re just going to have to see where those things end up.

But longer term, longer term, we’re going to have a much better, much more profitable business. Yes. This is what we’ve been saying now for the last 18 months.

We’ve got six, seven, eight different projects around the world, either new geographies, or new products, or new technology, and we’re investing significant amounts recognizing it’s going to be an investment both in our P&L and in the balance sheet. But longer term, we’re going to see good returns from all these things..

One last quick one, just a clarification. The $60 million to $70 million of start-up expense, I just want to make sure I understand, that is the total number? In other words, the $65 million minus $34 million last year, that difference is the incremental. Just want to understand that that’s correct, number one.

And number two, the $60 million to $70 million, is that a higher or lower number than you expected three or six months ago?.

So make sure I understand your question, so we spent $34 million in total start-up costs in 2017 and we’re estimating $60 million to $70 million of total start-up costs in 2018. That’s your first question, I think. In terms of - the start-up costs are something that we’re taking our best stab at.

And estimating here, 12 months before the end of the year and with all these projects moving back and forth, we know that that number is not going to be right. Last year was a little bit less than what we thought. And to be honest, I don’t remember where we were six months ago on start-up costs for 2018..

The next question will come from Mike Dahl with Barclays..

Frank, just a follow up. Not to beat this too much, but from a margin standpoint, when we’re talking about operating margins, understanding that this increase in D&A is also a big headwind in 2018 versus 2017.

So if we’re looking at EBITDA margins from a consolidated basis, would you have more confidence or more of a commitment to increasing EBITDA margins in 2018?.

I think I would address the EBITDA margins the same way I did the EBIT margins; that excluding start-up and excluding IP, we’re going to have good growth..

On the IP, it sounds like you’ve finalized some of the agreements that you were working through in the second half of last year.

Is there something you can now frame for us just to - I know you don’t want to necessarily give us this on an ongoing basis, but just help us understand what the new run rate looks like?.

What we can say is that patent revenue was higher due to the use of our technology in LVT around the world. Growth was better than we expected, and we are continuing to look for opportunities to expand it..

The next question will come from Laura Champine with Roe Equity Research..

Good morning. My question is on the margin in Global Ceramic, which missed what we were looking for by a little bit.

But I wonder relative to your internal estimates as you began Q4, was the final results better, worse, or about the same? And if you could help us by quantifying in that one segment in Q4, what did you absorb in terms of incremental start-up costs and inefficiencies as you launch new capacity and new product lines?.

Well, we brought up capacity in Mexico and we also brought up capacity in Europe during the period, and both of those start-ups went extremely well..

Do you have the numbers?.

$12 million incremental start-up costs there..

And as far as the adjusted operating income in that segment versus your expectations when you entered the quarter, how did that segment perform?.

Listen, they’re always too low..

And, Laura, I need to correct myself. The $12 million is total start-up. And I’ll have to come back to you on the incremental deal..

The next question is from Stephen East with Wells Fargo..

If we take a look at your growth both fourth quarter and first quarter and looking into 2018, in the fourth quarter you pretty easily beat your guidance that you had given at the end of October. I’m trying to understand from your prior perspective what changed and what accelerated to give you that beat.

I was wondering how much the carpet pricing and the carpet pull-forward played a role in that? And then as you look into 1Q and beyond, you’ve talked about pricing that you are already getting through and that’ll help significantly improve your operations.

But are there any other tangible drivers that we ought to be thinking about on the 1Q beat improvement?.

I think that the biggest piece, which wasn’t a surprise, we knew there was going to be some pull-forward of sales due to price increases. There’s the balancing of the pricing versus the costs and the flow-through and how they actually show up in the fourth quarter we do. There’s the FX rates that change on us; out of our control within there.

In general, the business levels were about where we thought they’d be when we went into them, and we think we have reasonable estimates for the first quarter, given all that’s going on..

And then going back to the capacity that you’ve got coming on, you’ve talked several times in the past you’ve got about, with all this CapEx, you have about $1.4 billion or so in capacity coming on over time.

Could you talk a little bit about how much of that’s come on so far, and then sort of give us a rough roadmap of when you think the rest of it is coming on, and then what you would expect in lag for sales filling up that capacity?.

It’s not as - the reason we can’t be more clear with you is it’s not like it falls at given minutes and you start it up and then the question is how long does it take to optimize? Then how long does it take to sell it? And then there’s overlapping across timeframes and years.

So I mean, the reason we tend to talk about it in multiple-year circumstances if you draw a line at any minute - we just talked about the line in - LVT line in Europe. It’s coming up and running two shifts. Now how long is it going to take us to sell it up and how long is it going to take us to optimize? We’re going to have to see..

Is it fair to assume though that as you look at that 1.4 billion, not the sales but the capacity itself, the majority of that capacity would be in place by the time we exit 2018?.

I’m hesitating because we gave the number a while back and I don’t remember if it was the incremental capacity on the investments we made in 2016 and 2017, which is I think what it was, and now what’s happening we’re moving into 2018 and there’s the 2018 investments which are different and some of those like the Mexican plant.

It’s up and running and it’s not far from the capacity that we had expected it to be at and it’ll be running fairly full, I mean, soon. And I don’t remember the cutoff times between that number and the moment in time we’re at right now..

And just one last, going back to the carpet and the price hike.

How much price hike was put through and how much do you think got pulled forward into the fourth quarter?.

The carpet price increase that we put in, we announced 5% to 6% to cover the inflation and pieces going on. Most of its implemented as we speak. The pull forward is hard to tell because we’re in this normal dip in the winter time. So we know what we got.

The question is we don’t know what the orders are going to be until we see what the customers - when they’re going to start ordering again. It’ll probably be the end of the quarter or maybe the first of next quarter before we have a good view of the actual what occurred..

The next question will come from Susan Maklari with Credit Suisse..

This is Chris on for Susan. Thanks for taking our questions. Our first question is on the move to consolidate sales between hard and softwood surfaces in North America.

What drove that change and how does that position you guys versus competitors and how far along are you on this process?.

So what we did in the residential business, we changed our regional sales management above the people that are - above the salespeople. So the salespeople are still segregated and selling each of the different product categories.

The sales management, we made the region smaller but then put the manager over both product categories, as we’ve done it, and then the management above there we’ve also changed.

And the initial stages so far are showing that our ability to influence the customers because we’re using that structure it looks like it’s going to help us meet the needs of the customers better and present all of the products better..

Thanks for that clarification. And then my second question is on the breakdown of CapEx. That $750 million you guys spoke to earlier, how much of that is going into the U.S.

versus some of your other faster growing markets?.

I don’t have it right now. I’d have to - we have it. I just don’t know it..

The next question is from John Lovallo with Bank of America..

It’s actually Pete Galbo on for John. Thanks for taking the question. I’m just wondering if you guys could quantify the porcelain countertop opportunity, as well as quartz, in the U.S. specifically..

We could take them separately. So the quartz, the countertop market is $5 billion with quartz estimated at $1.2 billion, and that’s growing more than 10% per year. We’re expanding our stone centers and product offering to support our new plant, which will start up at the end of this year, so that’s on quartz.

And then on porcelain, we have an Italian plant that’s starting this quarter that we’re selling both in the EU and the U.S. Porcelain countertops are really a niche product that’s going to take time to grow, but the plants also produce large sizes for floor, wall and facades..

And, Frank, just a quick modeling one.

What is driving the step-up in interest expense year-over-year for 2018?.

It’s not stepping up that much, to be honest, so I’m not sure exactly. It’s actually - it’s up probably about $3 million or $4 million, so it’s not stepping up that much. I don’t know what it is off the top of my head. I’ll get back to you..

The next question is from David MacGregor with Longbow Research..

Just at the end of the call here, a couple of two quick ones. Ceramic, Jeff, I think earlier responding to a question you had indicated that it was difficult to know where ceramic would grow. It’d be a function of what happened in LVT.

How much do you think LVT is cannibalizing ceramic growth right now? How much of a headwind are you feeling in your Ceramic business from LVT?.

I think you interpreted more finitely than I meant it. What I said was - what I meant to say was that LVT is taking a large part of the total incremental increase of all Flooring and Ceramic is going to be impacted the same as everything else, because it’s not just impacting a piece of it.

I would guess two-thirds or more, maybe even higher of all the growth in Flooring in the last year was taken up by LVT. Now, the question is will it start plateauing out or will it keep growing at the same rate. We’ll know after it’s over..

Second question still on the Ceramic space, what are your plans for opening additional stores in the U.S.? I think you’d mentioned 15 new stores in 2017.

What does that plan look like for 2018?.

Most of those stores, the 15. And then, we’ll have a few stores here and there, but nothing substantial..

What’s the base now? Can you give us the denominator?.

We have roughly 300 stores altogether..

Thanks very much..

And service centers..

The final question is from Eric Bosshard with Cleveland Research..

Two things. Entirely, I understand, Chris, you walked us through the capacity limitations in the first half of last year that sound like it got resolved through the year. Curious what we should think about in terms of the growth rate of that business in 2018. Also understanding the progress that was made through 4Q.

Does this business now get back to its traditional 5% or 6% growth? Is that how we should read sort of those moving parts that hurt last year?.

All we can say there is that we - it’s starting to come back and we think it’ll get back to where it’s been with the exception of the impact of LVT and other things that could impact the industry..

I think that in 2017, our estimate is that the Flooring category grew about 4% and our hope is that it’ll pick up close to that again, could be more. And then the question is how much of that goes into LVT versus spread around the other product categories. That one we’re having a hard time predicting, but we’re the largest manufacturer of LVT.

We’re putting on much more. We have a significant head start of anybody in making low-cost automated LVT in the world, and we think we’re well-positioned..

And so the category and the capacity constraints do get relieved? Just to make sure I understood the comments earlier.

The capacity constraints that hurt 2017, that you resolved in tile going into 2018?.

That’s correct..

And then, secondly, Jeff, I’m curious in your perspective the evolution of LVT over the last couple of years, specifically in terms of the product evolution and what your thoughts are on that. And then, secondly, the competitive set evolution, specifically the addition of domestic capacity and import capacity and what your perspective is on that..

LVT as a product coming into the marketplace has grown faster than anything that I’ve seen in my 40 years of history.

And part of its driven by that people like wood and stone looks on the floor, that it is an easy installation method, it is waterproof, which some of that you need and some you don’t need is it, but it’s being well-accepted as a new product. We’re going to have to see how it plateaus out.

The product has evolved dramatically in the last four or five years. The first - it’s normal when you come out but with stuff being made that - circumstances wouldn’t perform well on the floor and it’s gotten better. The style and design has improved. It’s now got three different categories of product.

There’s a rigid that’s selling at the higher-end, the flexible tends to be in the middle. Both of those tend to be Click products. Then the lower end tends to be glued down products and at lower price points, and the commercial tends to be more of the lower end. And it continues to evolve as all new products do. There are different methods of making it.

There’s different visuals going on and it’s going to take a while for it to evolve and level out on an ongoing basis.

We’re at the forefront of making highly-automated low-cost production on a local basis which nobody else has like we do and it’s going to advantage us long-term, however in the short-term it’s impacted our speed-to-market of new introductions because we’re going through the learning curves but we’re way ahead of everybody else..

And if I could just clarify two open questions here on the interest expense, we’re estimating it’s going to be up $3 million or $4 million in 2018 and that’s all driven by rate increases in the U.S. and Europe. The second open question had to do with start-up cost in Global Ceramics, incremental start-up cost in the fourth quarter were $2 million.

Operator?.

There are no further questions. At this time, I would like to turn the conference over to Mr. Lorberbaum for any closing comments..

We appreciate you joining the call. We're very optimistic about the market for this year. We are aggressively investing for the long-term benefit of our business and we think we'll have a stronger business two years from now than we have today. Thank you for joining us..

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect..